Loss is endemic in the obtuse “IPO” market
The initial grey market price of over Rs 1000 for Life Insurance Corporation of India’s (LIC) stock went miserably wrong. The grey market realised the patches late. Bulls retreated from the grey market even after seeing the commitment of angel investors. The debut of the largest life insurer’s equity might not have shocked the analysts who knew the behaviour of the secondary market. Anyway, the tepid listing that shocked the maiden equity buyers was not a big failure but a failure at the cost of optimists’ miscalculation.
Angel investors’ position tried to bolster sentiment towards the offer. The sheer size of the IPO and the RBI announcement of an interest rate hike by 40 basis points on the day LIC IPO opened for public subscription posed great challenges to the issue. The wrong-timed RBI announcement of interest rate hike shocked all market watchers. LIC’s offer of 221.37 million shares at a final price of Rs 946 per share was India’s biggest IPO to amass Rs 21,000 crores in the disinvestment chest of the government. Devolvement of the issue would have stained the image of the government and LIC management. BRLMs would have passed the buck on to RBI, had the issue failed. Somehow, the issue could sail through the bad weather. Yet, the secondary market did not leave it from taking the inevitable impact of the bad weather.
At the end of week-end trading, when the market went up over 2.9 per cent, LIC stock lost 1.72 per cent after touching a new low at Rs 825. In five trading sessions, the life insurance behemoth lost Rs 77,600 crore in its market capitalisation out of the size calculated on the upper band price of the offer. The investors at the upper band price lost more than 13 per cent within five trading sessions.
Where did it go wrong? Was the initial grey market quotes a ploy to seduce the investors? Did the institutional applicants, who jostled the oversubscription play a foul game for someone with the responsibility to make the issue a success? Even if the overall market sentiment was good investors would have got a chance to buy LIC shares at a lower rate as it would take time for huge floating stocks to get settled in the investors’ portfolio after traders fall silent.
The IPO market has been a high premium market where loss is expected. LIC knows it better than anyone else because it has bailed out many IPOs. Insurance sector analysts may not have forgotten the IPO of two public sector non-life insurers, which never saw the offer price after listing. Those stocks are unlikely to see the IPO price for at least two more years. Both are leaders in their segment, though not as big as LIC, which has several trillion worth of assets under management and several-fold larger liabilities underwritten. The loss it suffered in its IPO bail-out operation might be huge; maybe a sinful disclosure.
In the Indian market, some Book Running Lead Managers (BRLMs) are notorious for their IPO price discovery. It may be shocking to know the size of loss investors lost in the IPO some of them had lead-managed. They are still favourites of all high profile issues. They seem to have a network of investors who are capable of bailing out public issues from a devolvement.
IPO issuers were also greedy. They left no space for equity buyers to earn anything from investing in their offer. When they ate away the cream, the euphoria created by the issue made a trap for investors. But LIC was not as greedy as other IPOs since it limited the valuation to 1.5 times its embedded value against the global average of three times. At the ratio of 1.5 times, its valuation is a staggering Rs 6 trillion. That made the 3.5 per cent stake sale fetch Rs 21,000 crore. Yet, the listing debut made a haircut of over eight per cent, subsequently more.
Investors in the IPO market might not have forgotten the staggering 260 million share issue of Anil Ambani’s Reliance Power in 2008. No one knew the basis of its offer price of Rs 430 for retail buyers and Rs 450 for institutions. Investors were then too obtuse to write down cheques 72 times more. This farcical issue received a bid worth a quarter more than the embedded value of LIC of India! That is one of the funny sides of the equity market, where common sense works rarely. Many such obtuse offers had flown in to upset investors. Many issues had delivered lasting losses to investors. More disastrous were the exit cases of private equity investors.
No one knows why the regulator has been silent over the numerous listing disasters. Regulators might have reserved a provision either to impose a penalty or withdraw the merchant banking licenses of BRLMs which lead-managed such IPOs that fetched huge lasting losses to investors.
Compared with such IPO wreckages, LIC’s listing shock is not a lasting loss. It is an opportunity for serious investors to buy for long term gains. Several high profile IPOs have already shocked investors. Too many listing losses haven’t stopped IPOs after IPOs from sailing smoothly. Surprisingly, many of them managed to fetch a good size of oversubscription. While applying for the IPOs, don’t the applicants know the listing prospects? Don’t they know there will be an opportunity to buy the shares at discount after listing? They continue to be obsessed with the endemic IPO losses! Who keeps pumping money into the sure-loss IPOs? Are the “angelic” investors balancing the losses against the gains in their portfolio while hapless retail investors remain helpless? What is the mystery behind wasting money on IPOs? Is it an obtuse or a smart play or a repeated miscalculation?
Remember. It was tough for Infosys to sell its share at Rs 95 a share in 1993. The IPO underwriters had to bail out the issue, and Morgan Stanley picked up 13 per cent later fetching a fabulous return from the decision. The same Morgan Stanely shocked Indian investors after its first public offer of a mutual fund unit – the euphoria worked. Twenty months later, Infosys went in for institutional placement of its shares, each for Rs 450. Some estimates say Rs 20,000 invested in 1993 in Infosys would have become roughly Rs 6 crore now. Rs 45,000 in Reliance Power would have become roughly Rs 2000 now. The Indian stock market has been a strange place where magic and obtuse dominate. Never run after a euphoria, and never neglect what the big ones always neglect.
